About This Episode
Recorded the day before applications opened, Chris Barron brings on Andy Roach, a business banker at Kerndt Brothers Bank in Cedar Rapids, Iowa, to sort out the Paycheck Protection Program. Roach explains the loan is sized off the past 12 months of payroll: take one month of average payroll cost and multiply by 2.5. The purpose is keeping staff employed or hiring back people already laid off, and the loan originates through your own bank rather than directly with the SBA.
Barron presses on the question producers kept hearing, that farmers do not qualify. Roach says nothing in the guidelines excludes them, and that an LLC or sole proprietorship paying staff should be eligible, though no official verbiage had settled it. Seasonal help belongs in the average payroll calculation because the definition covers salaries, wages, commissions, or similar compensation, along with vacation, family, medical and sick leave, 401 match, and state and local taxes.
On forgiveness, expenses accrued over the eight weeks after origination get submitted to the SBA, which determines how much comes off the balance. Whatever remains had just been changed to 0.5 percent over two years, down from an earlier 10 years at 4 percent, with payments deferred six months. Roach separates this from the EIDL, a 30-year loan at 3.75 percent taken directly with the SBA, which cannot be used for payroll if you take PPP forgiveness.
“I thought I had a handle on it Monday, and then it turns out I had about 20% of the facts right.”
— Andy Roach
Key Takeaways
PPP loan size is one month of average payroll cost from the prior 12 months multiplied by 2.5.
Nothing in the guidelines excluded farmers; an LLC or sole proprietorship with paid staff should qualify, though official language had not confirmed it when this was recorded.
Seasonal and similar compensation counts in the payroll average, along with vacation, family, medical and sick leave, 401 match, and state and local taxes.
Expenses over the eight weeks after origination drive forgiveness; the remaining balance had just moved to 0.5 percent over two years with payments deferred six months.
You can hold both a PPP and an EIDL loan, but not for the same purpose; EIDL is 30 years at 3.75 percent and is taken directly with the SBA.
Roach's own caution: he thought he understood the program on Monday and later figured he had about 20 percent of the facts right, so confirm details with your lender and CPA.
Full Transcript
Chris: Welcome everybody to another episode of the Ag View Pitch, and today we have Andy Roach, who is a business banker in Cedar Rapids, Iowa. And there's been a lot of question and discussion around the idea of the Paycheck Protection Program, SBA loans, and all these conversations going on. And so I thought we would bring business banker on board here and try to answer some of the questions and clean up a little bit of the confusion. So welcome, Andy. How's it going today?
Andy
Roach: Chris, thanks for having me.
Chris: You bet. It's good to have you on here, and I know you've been studying a lot of what's going on here and getting things rounded up for your institution. Tell us a little bit about just the basics of the SBA loan, what it is and how this kind of fits into the CARES package and what opportunities that producers may have here.
Andy
Roach: Sure, yeah, so, so the SBA has put out a number of new programs specific to the economic effects from the coronavirus. One of the main ones that people have been asking about lately is the Paycheck Protection Program, the PPP. The main perk of this program is that it's designed to help make sure that businesses are maintaining staff or hiring back staff that they've laid off. And the, the program looks at your past 12-month history for payroll expenses, takes 1 month of those expenses, and takes it times 2.5 to determine your loan amount. So say in the past 12 months you had $120,000 of payroll, so $10,000 per month. The maximum loan amount you could get off of this program would be 2.5 times that, or $25,000. So after you've determined the loan amount, after the coming 8-week period following that, that 8-week period, the majority of those funds would be forgiven by the SBA.
Then what's left after that remaining balance is termed out. There's been some conflicting information that we're still trying to wrap our minds around because this program is brand new. We've heard that the remaining balance is termed out over 10 years at 4%, but it looks like now they've changed it so the remaining balance is termed out over 2 years at 0.5%. Yeah. And the main point— oh, sorry, you go ahead, Chris.
Chris: No, I wasn't asking a question. You're doing good.
Andy
Roach: Yeah, that's the main point of it is to make sure that employees are hired or are being maintained, and that the government is forgiving a portion of those funds to make sure that it's happening. Okay.
Chris: Let me back up and ask a real basic question because I continue to have people tell me that they've heard that, well, farmers don't qualify, first of all. So, what's your answer to that?
Andy
Roach: Yeah, there was a webinar that we were on the other day, and one of the questions I asked is, is if a farmer has staff with payroll, would they qualify? There's nothing written in the guidelines that says otherwise. The main thing is that you are an LLC or a sole proprietorship that has staff that you pay, and either maintaining that staff or hiring them back has been difficult because of the economic effect of this virus. So based on what's out there, it sounds like they should qualify, but there hasn't been any official verbiage saying one way or the other.
Chris: Okay, and with that said, let me, let me throw another question you may or may not have the answer for yet, but if you're a sole proprietor but you have seasonal help and they are not on an official payroll but you compensate them seasonally or possibly even as contractual labor or maybe even payment in kind.
Andy
Roach: Sure, yeah, and that's part of the reason that this program looks at the average payroll cost. There's a detailed list of what is included in payroll cost, and it says salaries, wages, commissions, or similar compensation. So when you look at the average over the past 12 months, seasonal help should be included in that calculation.
Chris: Okay, tell us a little bit about the process. So probably the first thing a farmer producer should do that feels like they may qualify, has a payroll, has, you know, some concern about, you know, maybe some employees that are maybe possibly more susceptible to COVID-19 or something in their needing to do things a little differently or interested in checking this out, what's the process? They need to call the banker and get an application, is that correct? And then can you talk us through that?
Andy
Roach: Absolutely, yeah. So this is a loan through the bank. So you would reach out to your bank to get all the required documentation to have the bank approve the loan and then also the required documentation by the SBA to submit the application for approval. So, you would reach out to your lender, tell them that you're interested, they'll gather up all the pertinent information that you would need, and they would go through the submission process for you.
Chris: Can you talk through the pertinent information that they need? What is that, that, you know, if a farmer is going to do that, what should they prep ahead of time before they call the banker? What information do we need to have rounded up?
Andy
Roach: Yeah, generally anything else that you would typically need to be approved at your local bank. If you've recently gotten your operating loan squared away with your bank, you've already given your banker your personal statement, your tax return, that sort of thing, that should be the majority of the information they would need to qualify you for the loan on their end. But the SBA would need additional documentation to verify the payroll expenses. So, if you have any monthly details about the labor that you've hired out, any pay stubs or anything like that, that would be the typical information the SBA would need to collect to submit. There's just very generic guidelines that they're looking for. There hasn't been anything official stating what that documentation is that the SBA will require.
But you can assume any type of history of payroll expenses that you have gathered up, I would just assume that you would need to give that to your lender as well.
Chris: Okay. Can you talk about a little bit too on payroll expenses, what all is considered part of payroll expenses?
Andy
Roach: Sure. Yeah. And I have a list here: salary, wages, commissions, payments of vacation, family, medical, sick leave. If you're doing any type of 401 match, that type of thing would be included in there. State and local taxes. There's a pretty long detailed list of different things that would qualify as payroll in the eyes of the SBA. So I would just recommend reaching out to your lender and they can get you a much more detailed list. Of what those costs would include.
Chris: Okay, and then a portion of this loan, as you said, is forgivable. Can you talk a little bit about what the requirements are to meet that criteria?
Andy
Roach: Absolutely, yeah, and I'm sorry if I went over that a little too quickly at the front of this.
Chris: No, it's good.
Andy
Roach: But the— say the loan originates tomorrow, April 3rd. Over the next 8-week period, you would need to gather up any information that would be considered forgivable for this loan. And again, you can reach out to your lender and they'll give you a list. It's, it's a pretty long list detailing out what is considered forgivable. So after that 8-week period, I believe come June 30th is when the application process for this ends. The SBA will send out a new application with you detailing out the list of those expenses that you've accrued over that 8-week period, and then they will determine how much of that can be forgiven off the balance of your loan. Then whatever that remaining balance is after that 8-week period is then set up as a 0.5% interest rate loan.— to the best of my understanding, this keeps changing, but it's set up as a 0.5% interest loan over the next 2 years.
And the other thing with after the portion is forgiven, your— the payments are also deferred for 6 months after that. So you get that 8-week period forgiven, whatever the remaining balance is, is set up on a low interest rate loan, deferred for 6 months, and then termed out for 2 years after that.
Chris: Okay, another question, and it kind of ties into this indirectly, but if the producer decides to go with payroll tax credit, they're not eligible for the SBA loan then, correct? So if they decide, you know, it's— they talk to their CPA and they decide, you know, we need to just probably go through the payroll tax credit, portion as opposed—
Andy
Roach: they can't do both? Great question.
Chris: Yes.
Andy
Roach: So one of the other programs that are out there right now is called the Economic Injury Development Loan, I believe it is, the EIDL. That one is directly between the customer and the SBA. The bank doesn't originate that loan. You can do both loans, but you cannot do the EIDL loan for the purposes of payroll. You can't have both loans for the same purpose. You could have the EIDL loan for another purpose, but you can't use that and expect to get the grant, the forgiven loan with the payroll protection loan. Okay.
Chris: Is there anything specific to the EIDL loan that people should be aware of, or is that something that you,— you know, obviously you recommend they talk to their CPA probably on that one specifically, correct?
Andy
Roach: Right, yeah. Your banker can give you generic information on that, and I can give you some very, very high-level overview of it. If you're interested, you would go to COVID19relief.sba.gov. This is directly between the borrower and the SBA. It's a 30-year loan with a rate of 3.75% for small businesses. That's about the most generic information I could possibly give you about it, but if you were interested in something like that, I would recommend talking to your lender or talking to your CPA or going out to the SBA's website and doing some research yourself.
Chris: Sounds good. Is there any questions that I haven't asked? I think we've kind of covered a lot of it, at least what we know, as I said at the beginning of the podcast. There has been a pretty large amount of confusion and misinformation that was a little troubling the first couple of days, and so we wanted to make sure we could get as many facts out there as possible. Is there anything else that I haven't asked that should be pointed out?
Andy
Roach: No, I think you did a great job covering everything. The important thing to keep in mind is There's been new information that has come out every day since Monday. I thought I had a handle on it Monday, and then it turns out I had about 20% of the facts right. So we'll see how much of this is accurate beginning tomorrow when the application process begins. But the important thing I would just make sure is to reach out to your lender, let them know that you're interested in the program, see if you would qualify for this program, because if you do, having 80% of your loan forgiven and then having the remainder at 0.5% is a very enticing loan for anybody. The important thing is just to reach out, check to see if you qualify, and take the necessary steps from there.
Chris: Yeah, I appreciate that. And I know some of the operations that we work with across the United States are facing some challenges right now with labor, and really part of it is just the unknown too. You know, maybe everybody's currently healthy right now, But, you know, we got a— we're just entering planting season for the majority of our clients, and the workload is only going to get more intense. And so anything we can do, both with where we see commodity prices right now and all the other challenges, we need to probably do everything we can to keep our businesses working and being sustainable.
Andy
Roach: Sure. Absolutely. Yeah. And even if you personally don't qualify for this program, it's important to reach out to your lender and see if there's anything else they can do to help you in the meantime. Because even though the SBA has fantastic programs and this is meant to make sure that businesses are afloat and people are paid, your lender is always the first person you want to reach out to because even if it's not this program, maybe it's bumping payments or something for you because we're all here to help out our customers as best as we can. Right.
Chris: Well, Andy, it's been a great conversation, very informative, and we sincerely appreciate your time.
Andy
Roach: Thanks a lot. Absolutely. Thanks for having me.
Chris: You bet. That was Andy Roach, business banker in Cedar Rapids, Iowa, and we appreciate everybody listening, and we'll try to get back with some more information as things change. And thanks again, everybody, for listening. We'll catch you next time on the Ag View Pitch.